International tax considerations related to structuring your client's non-US operations. For more information, visit www.cbiz.com

1. Business without Borders in a “Flat” World:
International Tax Considerations Related to Structuring Your
Client’s Non-US Operations
Presented by
Stuart Anolik, Esq.
Managing Director, CBIZ MHM, LLC.
1

2. Circular 230 Notice
Any tax advice contained in this program is not intended to
be used and cannot be used for the purposes of avoiding any
penalties that may be imposed by the Internal Revenue
Code.
2

3. Worldwide vs. Territorial Taxation vs. Deferral
• Worldwide
– U.S. persons (individuals, partnerships, LLCs, and corporations) and residents are subject to
U.S. tax on their worldwide income. See §§ 1 and 11 of the Internal Revenue Code of 1986, as
amended (the “Code”).
– §§ 871, 881 and 882 of the Code subject non-resident aliens and foreign corporations to U.S.
tax on U.S. source income. See §§ 861 through 885 of the Code for rules to determine US and
foreign source income.
• Territorial Tax/Exemption System
– Foreign income of residents is not taxed (some jurisdictions exempt some but not all foreign
income of residents by taxing a resident’s foreign income once it is repatriated)
– Examples of Countries with a territorial tax system
• Deferral
– The postponement of current taxation on the net income or gain economically accrued by a
taxpayer
» Ability to use pre-US tax dollars for international expansion
» Increases cash flow
» Increases earnings per share and thus shareholder value 3

4. Territorial Tax/Exemption System
• Territorial Tax Systems
• Hong Kong
• Singapore
– How it works
• Exemption Systems
• Netherlands
• Cyprus
– How it works
4

5. Deferral and Subpart F Income
• Defined: A US shareholder of a controlled foreign corporation
(“CFC”) is required to include in income certain types of income
earned by the CFC, even though such income is not distributed
to the US shareholder. Section 951(a)(1)(A)(I).
– A “US shareholder” is defined as a US person who owns directly,
indirectly, or constructively 10% or more of the combined voting
power of all classes of stock entitled to vote. Section 951(b).
– A “CFC” is defined as a foreign corporation in which more than
50% of its stock, by vote or value, is held by US shareholders at any
time during the year. Section 957(a).
5

6. Deferral - Subpart F Income
• Overall “Foreign Base Company Income” (“FCBI”) – Special Rules
– De Minimis Rule
• If foreign base company income and insurance income is less than the
lesser of 5% of gross income or $1 million  the income is not included
– Full Inclusion Rules
• If the sum of foreign base company income and insurance income is
greater than 70% of gross income  full amount is included in income
– High Tax Exception
• If the foreign base company income is subject to an effective rate of
income tax imposed by a foreign country that is greater than 90% of the
maximum rate of tax in the US  the income is not included
6

7. Foreign Base Company Sales Income (“FBCSI”)
Example 1:
• USCo develops software program
• ForCo acquires software through a non-
USCo exclusive 3-year license
• Unrelated customer either downloads the
software or the software is drop shipped
- Is this Subpart F income?
ForCo
Bermuda
Unrelated
Customer
Outside
Bermuda
7

8. FBCSI (con’t)
Example 2:
- Same facts as Example 1 except ForCo is
USCo involved in software reproduction, packaging and
printing manuals
- Is this Subpart F income?
ForCo
Bermuda
Unrelated
Customer
Outside
Bermuda
8

9. Exception for Sale of Manufactured Property
 FBCSI does not include Components
income derived from the Raw Materials
(Related) Manufacturer
sale of personal property
manufactured by the
seller (even if raw
materials were purchased Customer
from a related person)
 Definition of “manufacturing”: If the product sold in effect is not the
same product that is purchased.
Two Tests:
1. “Substantial transformation test”: Conversion costs are
greater than 20% of cost of goods sold), such as transformation
of wood pulp into paper.
• Packaging, labeling, or minor assembly will not constitute
mfg. 9

10. FBCSI – Manufacturing Exception (con’t)
2. “Substantial contribution test” – CFC treated as manufacturer if it
makes “substantial contribution” through its own employees; contract
manufacturing (Reg. §1.954-3T(e), as amended by TD 9438 (12/29/2008))
• Weigh economic significance of functions performed based on
indicia of mfg:
– Oversight and direction of the mfg activities or process
– Activities considered in, but that are insufficient to satisfy, the substantial
transformation test
– Material selection, vendor selection, or control of the raw materials,
work-in-process or finished goods
– Management of mfg costs or capacities (e.g., managing the risk of loss,
cost reduction or efficiency initiatives associated with the mfg process,
demand planning, production scheduling or hedging raw material costs)
– Control of mfg related logistics
– Quality control (e.g. sample testing or establishment of standards) 10

11. FBCSI – Branch Rule
• Buying, selling, or manufacturing branch treated as separate
subsidiary if:
– Created or organized outside CFC’s country of
incorporation, and
– Tax effect of branch is same as if it were a subsidiary (i.e.,
tax rate on branch is less than 90% and 5% points less than
rate on home office of CFC)
• Case law does not impute activities of related or unrelated contract
manufacturers for purposes of branch rules; but does impute it for
purposes of contract manufacturing
• Practical effect is to treat branches outside home country as
generating subpart F income if tax benefit obtained by having
branch
• Applies also to 70% full inclusion rule
11

12. Foreign Base Company Services Income (“FBCSVI”)
Example 3:
USCo - Post-sale services provided by Bermuda
- Help desk located in Bermuda
Software - Web site development in Bermuda
- Is this Subpart F income?
ForCo
- Where are the services performed?
Bermuda
Services
CUSTOMERS
12

13. FBCSVI (con’t)
Example 4:
- Same as Example 3 except ForCo retains
USCo employees. Services at
USCo customer location in Ireland
Software
- Is this Subpart F income?
ForCo
Bermuda
Services
CUSTOMERS
13

14. Foreign Personal Holding Company Income
Example 5:
- ForCo develops copyright-protected
content and licenses it
USCo
- ForCo continuously updates the
materials
- ForCo receives royalties for the use of
the materials
ForCo - Is this Subpart F income?
Bermuda
CUSTOMERS
14

15. 956: Investment in US Property
• US Shareholder must include in income its share of CFC’s
basis in investment in US property in excess of:
• Prior inclusions under Section 956
• Limited to current and accumulated E&P reduced by current
distributions
15

16. 956: US Property
• Tangible property in US
• Stock of US corporation
• Obligations of US person
• Rights to intangible use in US
16

17. 956: Intangible Property
• A right to use intangible property (patent, copyright, invention,
design, secret process or other similar right) acquired or developed by
the CFC for use in the US is considered property for section 956
purposes. Section 956(c)(1)D)
– Unless otherwise demonstrated, a right actually used principally
in the US will be considered acquired or developed for use in the
US. Treas. Reg. section 1.956-2(a)(1)
17

18. Entity Classification – Reg. §301.7701-2(a)
 Definition of “entity” for federal tax law is independent of local law.
 A business entity is any entity recognized for federal tax purposes that is not a “trust”.
Note: A trust by definition is not a “business entity.” Any entity that is called a
“trust” but which carries on business (as opposed to investment) activities is a
business entity that must be classified as set forth below.
 A business entity with two or more members can be a corporation or a partnership.
 A business entity with only one owner is classified as a corporation or is disregarded.
 If an entity is disregarded, its activities are treated in the same manner as a sole
proprietorship, branch or division of the owner.
18

19. Corporations Include:
 A business entity organized as a corporation under a Federal or State statute.
 Associations electing to be classified as corporations under Reg. §301.7701-3.
 A business entity taxable as an insurance company under Subchapter L of the Code.
 A business entity conducting “banking activities and deposits insured under the Federal
Deposit Insurance Act.”
 Certain foreign entities.
19

20. Entity Classification – Making the Election
 Executing the Election
The election must be signed by:
• Each member of the entity (including foreign owners), or
• Any member, owner or officer authorized under local law to make the
election.
• If the election is retroactive and membership changes, members that have
withdrawn between effective date and date of filing must also sign the
election.
 Sixty Month Rule
• Once an affirmative election is made, a new election for the same
entity cannot be made for 60 months.
• Does not apply for initial classification if the default classification
is used, or for elections effective 1/1/97
• Exception for more than 50% ownership change. Requires prior
permission from the IRS.
20

21. Entity Classification – Making the Election (con’t)
 How to Make Election: File Form 8832 - Entity
Classification Election
 Effective Date of Election:
• On the date specified on the form, so long as that date is
(i) not earlier than the 75th day prior to the date of filing,
and (ii) not later than one year from the date of filing.
• If no date is specified, the election is effective on the date
of filing.
 When Election Should be Filed:
• When an eligible entity chooses not to adopt the default
classification (discussed below).
• When an eligible entity wishes to change its current
classification. 21

22. Entity Classification – Default Rule
• Effect of Failure to Make Affirmative Election
• If the entity is domestic, it is classified as a partnership or a branch.
• If the entity is foreign, it is classified as a corporation if all of its members
have limited liability, or as a partnership or a branch if one or more
members do not have limited liability.
• Note that this is a strict legal liability test, not a substance over form
test. This differs from the limited liability test under the old
classification rules, where (for example) one looked to whether the
member had assets which could be used to satisfy claims asserted
against it in determining whether the member had limited liability.
• On the other hand, the liability must arise by reason of being a
member. For example, a mere guarantee of a subsidiaries debts
would not be enough to establish a lack of limited liability.
22

23. Permanent Establishment
• OECD Model Treaty article
• Application to electronic commerce of the PE definition.
• Does a server at a given place may ever constitute a PE:
– No PE is web site hosted on the server of a ISP who maintains control
of the server.
– A PE could exist where enterprise carries on business through a web
site and also owns or leases and operates the server on which the
website is stored and used.
• Whether human intervention is required for a PE to exist.
– To what extent is human intervention necessary for automatic
equipment to be considered a PE?
– Whether the intervention must necessarily take place in the country
or can be done from abroad?
– Different views on all above.
23

24. Business vs. Passive Income
• Generally, if you are engaged in a trade or business
you will be subject to tax on your net income
• If a nonresident receives interest, dividends or royalties
that are U.S. sourced, there is a flat 30% withholding
tax due on the gross proceeds paid
– Withholding tax can be limited or eliminated pursuant to
an income Tax Treaty
24

25. Source
 Inventory Sales Income
• Title Passage
• Manufacture in U.S. and Sale Abroad = 50/50 Source
 Royalty Income – Place of Use
 Sale of Intangible
• Contingent price = same as royalty
• Lump sum = residence of seller
 Rental Income – Place of Use
 Services – Place of Performance
25

26. Characterization
 Determines:
• Application of Source Rules
• Application of CFC Rules
• U.S. Taxing Rights on Foreign Persons
• Application of Foreign Tax Credit Rules
• Application of Transfer Pricing Rules
26

27. Characterization – Software Regulations 1.861-18
 Four categories:
• Transfer of copyright rights
– Right to reproduce/display for public
– License or sale of rights
• Transfer of copyrighted article
– Site license ok
– Sale or rental of article
• Provision of Services
• Provision of know-how
27

28. Characterization of Income
• Characterization important
– Double taxation if source and residence country characterize income
differently.
– If income characterized as a royalty, withholding tax (“WHT”) may apply.
• OECD Model treaty article 12(2): payment of any kind
received as a consideration for the use of, or right to use, any
copyright of literary, artistic or or scientific work including
cinematography films, any patent, trade mark, design or
model, plan, secret formula or process, or for information
concerning industrial or scientific experience.
• OECD revised commentary deals with consideration for
computer software:
– Transfer of copyright article = sale
– Partial transfer of copyright article = royalty
• Characterization of income under US law 28

29. Entity Characterization - Terminology
 A per se corporation includes:
• A domestic corporation organized under any federal
or state statute describing the entity as
“incorporated”;
• a foreign entity on the per se list (generally public
limited companies).
 An “eligible entity” is any entity other than a per se
corporation.
29

30. Example – U.S. Developed Software
 Software developed in U.S. and sold abroad
• Sale of copyrighted article = 50/50 source
• License of copyright right = 100% foreign source
royalty
 Planning to maximize foreign tax credit – license
foreign affiliate to copy and distribute
30

31. Inbound Investments – Investments by Foreign Persons
• Foreign individuals and entities that are not engaged in a U.S. trade or business
are subject to withholding tax on certain payments from U.S. sources at a 30%
rate. The tax applies to the gross amount of the payment. The types of
payments (referred to as “fixed or determinable annual or periodic” or “FDAP”
income) subject to withholding are:
– Dividends (including dividend-equivalent payments pursuant to swaps or securities loans)
– Interest (big exception for “portfolio interest” – see next slide)
– Rents
– Royalties
– **Note: Capital gains are NOT treated as FDAP income (but see FIRPTA, on the next slide)
• Must be from US sources – payments to foreign individuals or entities from
foreign sources are not subject to withholding tax.
• Withholding tax is collected by payors of FDAP income that are “withholding
agents” (U.S. banks, financial instititions, corporations, etc.). Withholding
agents report taxes withheld to the IRS on Form 1042-S.
31

32. Inbound Investments – Additional Rules
• FIRPTA: Gain by foreign individuals or corporations on the sale of U.S. real estate is treated as income that is effectively
connected with a U.S. trade or business subject to net basis tax, and requires the foreign seller to file certain disclosures
with the IRS and to file a U.S. income tax return. This rule applies to the sale of stock of a U.S. corporation that holds
U.S. real property assets the value of which constitute more than 50% of all the corporation’s assets (there are
exceptions, such as for publicly traded companies and domestically controlled REITs). In addition, an interest in a
partnership or trust can be treated as U.S. real property to the extent the interest is attributable to U.S. real property
held by the partnership or trust. Interest in U.S. real property solely as a creditor (e.g., loan that is secured by a
mortgage on U.S. real property) will not be subject to the FIRPTA rules.
• Substantial Presence: An individual who is present in the U.S. for at least 183 days during the tax year will be treated as
a U.S. person who is subject to tax on all income from all sources. A foreign person that spends time in the U.S. over the
course of 3 years will have to count years spent in the prior years along with time in the current tax year toward the 183
day threshold.
• Portfolio Interest: Interest from U.S. sources is usually exempt from withholding when paid to a lender, so long as the
lender owns less than 10% of the debtor; and so long as the interest is not being paid to a CFC by a related person (e.g.,
its U.S. shareholders).
• Branch Profits Tax: If a foreign corporation operates an unincorporated branch in the U.S. through which it engages in a
U.S. trade or business, the U.S. applies rules that treat the branch as if it were a U.S. corporation that distributes
dividends to its foreign parent when it earns profits that are not reinvested in its U.S. business.
32

33. Inbound Investments – Form W-8
• How does a withholding agent determine if the recipient of FDAP income is
subject to withholding or is a U.S. resident subject to net income tax (no
withholding required)? The recipient must submit the appropriate Form W-8
to the withholding agent to establish its foreign status and eligibility for
benefits under a tax treaty.
• Foreign individuals and corporations typically submit a W-8BEN; entities
exempt from U.S. tax (such as a foreign central bank) file a W-8EXP;
partnerships with foreign partners must file a W-8IMY and include the
appropriate form for each partner (W-8 for foreign partners, W-9 for US
partners) as well as additional documentation that helps the withholding
agent determine the correct withholding.
33

34. Tax Treaties:
Countries that Have an Income Tax Treaty In Effect with US
* applies to Armenia, Azerbaijan,
Belarus, Georgia, Krygystan, Moldova,
Tajikistan, Turkmenistan, and
Uzbekistan
34

35. Tax Treaties – Limitation on Benefits Clause
• Tax treaties provide relief from double taxation to residents of countries that
are tax treaty partners, usually via a reduced withholding rate or exemption
from withholding.
• A taxpayer demonstrates it is not a U.S. person and that it qualifies for treaty
benefits by providing a Form W-8 to the payor of the FDAP income.
• This relief is available generally to persons or entities that are legitimate
“residents” of the treaty country. Treaties attempt to protect against treaty
shopping by employing a “Limitation on Benefits” or “LOB” provision. Most
U.S. tax treaties have an LOB provision.
• Notably, the U.S.-Hungary and U.S.-Poland treaties do not have LOB
provisions, although there is a new treaty with Hungary awaiting approval by
the Senate and the Treasury Department has discussed revising the U.S.-
Poland treaty to add an LOB provision.
35

36. Limitation on Benefits (con’t)
• A typical modern Limitations on Benefits article (generally,
in treaties or treaty protocols signed after 1988) limits
benefits to the following persons:
– 1. Individuals who are resident in a Contracting State;
– 2. Contracting States or their political subdivisions or local authorities;
– 3. Resident tax-exempt organizations (e.g., pension funds) if more than one half of the organization's
beneficiaries are qualified residents of a Contracting State;
– 4. Persons resident in a Contracting State if (a) more than 50 percent of the beneficial ownership interests
in the persons are owned by qualified residents described in items 1 through 3 above or item 5 below or
by U.S. citizens and (b) less than 50 percent of the person's gross income is paid out to nonresidents in the
form of interest, royalties, or other deductible payments;
– 5. Resident companies the shares of which are substantially and regularly traded on one or more
recognized exchanges in either Contracting State;
– 6. Resident entities that are engaged in an active trade or business in the residence State if the income
derived from the other State is derived in connection with or incidental to that business; and
– 7. Persons obtaining a favorable determination from the competent authority.
36

37. Tax Treaties – Conduit Rules
• Some taxpayers attempt to route payments through entities in treaty
countries that would qualify for treaty benefits, and pass that income on to a
non-treaty jurisdiction.
• The seminal conduit case is Aiken Industries, Inc., 56 TC 925 (1971): A
Bahamas company wholly owned a U.S. subsidiary and a Honduras subsidiary.
The Bahamas parent loaned money to the U.S. subsidiary. Interest payments
from the U.S. to the Bahamas would be subject to 30% withholding. Instead,
the Bahamas parent transferred the U.S. subsidiary’s note to the Honduras
subsidiary, in exchange for similar notes issued by that subsidiary. As a result,
the interest paid by the U.S. subsidiary to the Honduras subsidiary was
exempt from withholding under the U.S.-Honduras tax treaty, and those
interest payments were effectively transferred to the Bahamas parent under
the notes issued to the Honduras subsidiary.
37

38. Tax Treaties – Conduit Rules (con’t)
• The Tax Court ruled that the U.S.
Original loan
from parent to
subsidiary’s interest payment had not
US subsidiary
Bahamas Interest –
been received by the Honduran
identical to
Parent payment from US
sub
corporation because:
(1) receipt for purposes of a treaty required more
than the mere “obtaining of physical possession on
a temporary basis;”
(2) receipt required “complete dominion and
control over the funds;”
(3) all the corporations were members of the same
U.S. Interest – exempt Honduras group;
from US
Subsidiary withholding Subsidiary (4) the transaction had no economic or business
purpose and was solely to obtain the treaty benefit;
and
(5) the Honduran corporation, in effect, was a mere
collection agent and conduit.
38

39. Foreign Tax Credit
“Foreign Tax Credit” refers to the credit for foreign taxes paid by a U.S. taxpayer.
(1) Who can claim the FTC:
 The FTC can be claimed by US citizens (including a husband and wife filing a joint return), domestic
corporations, affiliated corporations filing a consolidated return, resident aliens.
 Partners in partnerships and shareholders in S corporations are able to claim an FTC for their
proportionate share of partnership’s or S corporation’s foreign tax liability.
 Estates and trusts may claim an FTC for foreign taxes attributable to beneficiaries.
 A tax-exempt entity may be entitled to an FTC where taxes are imposed on unrelated business income.
(2) Which foreign taxes will qualify: Tax must be “creditable”
The payment must be a “tax” (compulsory payment pursuant to the authority of a foreign country to
levy taxes);
the tax must be paid or accrued to a foreign country or a U.S. possession; and
the tax must be an income, war profits, or excess profits tax (or must be paid in lieu of such a tax, which
means its predominant character is that of an income tax in the U.S. sense).
39

40. What is Transfer Pricing?  Transfer pricing relates to transactions between separate but
related companies, located in different countries.
 Transactions involve exchange of either tangible or intangible
Parent assets between the related companies.
Company in
home
 Assets can be either goods (tangible or intangible) or services.
country
 Transfer price is established to reflect the arm’s length values
of the goods or services exchanged in the transaction.
Transfer price
established to Transact  “A controlled transaction meets the arm’s-length standard if
reflect arm’s length Goods & the results of the transaction are consistent with the results
values of Services that would have been realized if uncontrolled taxpayers had
transaction engaged in the same transactions under the same
circumstance” [Treas. Reg. §1.482-1(b)(1)]
Subsidiary  Form 5471-Schedule M
in a foreign
country
40

41. So What?
 Transfer price is mutually agreed upon by the related companies. It is not determined by market
forces
 The transaction is a significant opportunity for the parent company to shift taxable income to
countries with lower tax rates
 The international relationship is generally operation driven, not tax driven. Some times, tax
strategies are the primary reason for establishing the relationship
 The motivations of the parent company are at odds with the motivation of the taxing authorities
 Ernst & Young Global Transfer Pricing Report (2007-2008):
• More than 75% of respondents to an Ernst & Young Survey believe that transfer pricing will be critically
important to their companies over the next two years
• More than 66.7% of respondents see an increased need for transfer pricing services
• More than 85% consider transfer pricing a risk in regard to managing their financial statement risk
• More than 50% of respondents have undergone transfer pricing audits
41

42. Purposes of a Transfer Pricing Analysis
Parent Document a Assess
Company in
Address
Evaluate a new or transfer pricing exposure in the
home international and
existing inter- policy in event of an audit
country state tax planning
company transfer accordance with (by either the IRS or matters
pricing policy the applicable a foreign taxing (proactive use of
regulations authority) adjustments)
Transact
Goods &
Services
Sub in a
foreign
country Clients have turned to CBIZ for independent transfer pricing
analyses.
42

43. Possible Structure for
E-Commerce Sales and Services
Cost Share Advertisers
USCo Fees
rt ising 3rd Party
Adve
Software Advertising Share
Sales ForCo
Subscription Share Online Provider
Bermuda
3rd Party
Subscription Fees
Subscribers/Customers
Foreign of Online Provider
Subs Consulting
Services
Legend:
Software
Branch for Sales
US tax purposes
43

44. CASE STUDIES
44

45. FACTS US Co. •How should the payments from the 2nd tier
US co. wants to set up Offshore Co., a subsidiaries be structured (dividends,
holding company that will allow it to interest, royalties)?
conduct activities in foreign countries and to •How should payments be structured
defer US tax on the income from those between US Co. and Offshore Co.?
activities. The second tier subsidiary •Where should Offshore Co. be
companies make payments to Offshore Co. incorporated?
Offshore Co. may repatriate cash to US Co., OFFSHORE Co.
hold onto the income, or distribute cash
among the second tier subsidiaries.
Payments from subsidiaries
Mexico UK South Africa Jordan Israel
= “Check-the-box entity” – disregarded for US tax purposes
45

46. Mauritius
Cyprus UK Ireland
(GBC1)
26% or 24%; losses of UK sub 12.5% for income from “active”
Corporate tax on resident
3% 10% may be used by UK parent business; 25% for passive
holding company
(“group relief” provisions) income
FTC available Yes Yes Yes Yes
No, but there is a general
Transfer pricing rules arm’s length requirement under Yes, but they are limited Yes Yes (new in 2011)
local law
Yes from nontreaty countries No; exemption from defense
Tax on inbound dividends No (for most dividends) Yes – 12.5% or 25%
(e.g., Mexico) – 3% tax
No, but defense tax on
dividends from foreign subs No but there is a tax on closely
CFC rules No Yes
that have lightly taxed passive held Irish corporations
income
Israel, Mexico, South Africa, Israel, Mexico, South Africa,
Tax treaties South Africa, UK South Africa, UK, US
US (plus many others) UK, US
No withholding on dividends, No withholding on dividends, No withholding on dividends, No withholding on dividends,
Withholding interest, or royalties paid to interest, or royalties paid to interest, or royalties under tax interest, or royalties under tax
nonresidents nonresidents treaties treaties
46

47. US Co.
FACTS
US Co. wants to buy equipment and lease it to
its foreign operating company, located in
Offshore Co.
India. US Co. would like to defer paying any
US tax on income generated in India, but
would like the option of repatriating money
back to the US.
India Operating
Company
47

48. CBCC (US) Back to Back Lease
Dividends/lease
Withholding on rental
payments
payment from India 10.506%
CYPRUS Mauritius tax on rental
3%
Master income
lease of
equipment Dividends/lease
payments Withholding on dividend
to Cyprus 0%
MAURITIUS Cyprus tax on dividend
income 0%
Sublease of Lease
Cyprus withholding tax on
equipment payments
dividend to US 0%
Indian Operating
Company US tax on dividend from
Cyprus 15%
48

49. EXAMPLE – BACK TO BACK LEASE
US Co.
Payment Taxation
Master lease $10 lease
10.506% Indian withholding tax
of equipment Dividend payment from
payments ($1.05) = $8.95 net payment
India
$10 gross rental payment - $9
CYPRUS $8.95 income
rental payment to US Co. = $1.
$1 x .03 = $.03 Mauritius tax
received by
$1.05 FTC: $.03 - $1.05 = $0
Mauritius
Mauritius tax
 No US tax (disregarded)
Lease
payments Dividend $8.95 dividend
No Mauritius withholding tax
payments from Mauritius to
No Cyprus tax on dividend
Cyprus
MAURITIUS $8.95 dividend
from Cyprus to US
No Cyprus withholding tax
US tax on dividend: $8.95 x .15 =
Co. $1.34
Net proceeds to
$8.95 - $1.34 = $7.66
Sublease of Lease US Co.
equipment payments
Effective tax rate
$1.05 + $1.34 = $2.39 total tax
Indian Operating on $10 rental
2.39/10 = 23.9% rate
payment
Company
49

50. CBCC (US) Using a Disregarded US LLC
Dividends/lease Withholding on rental
payments payment from India 10.506%
(India  US)
Cyprus tax on rental
CYPRUS income
Master (US LLC receives income 0%
lease of
equipment
for Cyprus tax purposes)
Lease
payments US tax on rental income
(Cyprus entity receives
income for US tax 0%
purposes)
US LLC
Cyprus withholding tax on
dividend to US 0%
Sublease of
equipment
US tax on dividend from
Cyprus 15%
INDIA
50

51. Questions
What if US Co. developed and manufactured the equipment, and the Indian
operating company paid royalties?
If the Mauritius entity had to set up and maintain the equipment in India, what
effect would it have? Would it cause Mauritius entity to be taxable in India?
Would the Mauritius entity have a permanent establishment under the India-
Mauritius tax treaty?
What if, instead of using a US LLC, we used a Cayman Islands entity that is
disregarded for US tax purposes?
What if the Indian operating company was engaged in the sale of equipment, and
rather than leasing and owning the equipment it purchased the equipment and
sold it? What if the Indian operating company purchased raw materials and
manufactured the equipment and then sold it to third parties?
51

52. USCO currently procures inventory from unrelated manufacturers
In China
USCO contracts with local Representatives that handle logistics
USCO and quality control
Recommendation
Funds 1. Have USCO form a Hong Kong entity (HK Co) to handle the Chinese procurement
100% activities (liaison, quality control, negotiation in PRC and logistics).
9. HK Co operates as a representative office in PRC.
a. Legal representative of branch required to pay individual income tax.
b. Pay only expenses of branch (i.e., rent, electricity, local staff salary, taxes,
HK CO etc) from branch bank account in PRC.
HK c. Goods sold to HK CO and directly shipped to US by PRC suppliers.
d. Funds remitted to HK bank account and purchases paid from HK bank
account.
Goods
Issues
HK Co
Branch 17. So long as no business activities performed in HK as well as no physical office (e.g.,
negotiation occurs in PRC and USA), no HK income tax.
Funds 18. HK Co representative office in PRC subject to tax based on cost plus basis (see
PRC spreadsheet).
Suppliers
52

53. Tax Issues in
China and India
53

54. Tax Issues in India – The Vodafone Case
•In January 2011 the India Supreme Court found in favor of Vodafone, and held that Indian
revenue authorities did not have jurisdiction to impose withholding tax on the sale of stock of an
Indian company, where no party to the sale transaction was an Indian resident.
•Facts: As background, Vodafone’s Dutch subsidiary acquired the stock of a Cayman Islands
company from a Cayman Islands subsidiary of Hutchinson Telecommunications Intl Ltd. The
Cayman company acquired by Vodafone owned an indirect interest in an Indian company; there
were several other entities interposed between the Cayman company and the Indian company.
The Indian tax authority attempted to impose a $2.5 billion withholding tax liability on
Vodafone’s $11.1 billion purchase of the Cayman company, alleging that the asset being
purchased was the indirect interest in the Indian company. Indian tax law permits India to
impose withholding tax on gain from the sale of a capital asset where the asset is located in India.
•What The Decision Means: The case provides certainty to non-Indian companies that India will
not tax capital gains in this scenario. It also reflects the view of many practitioners that
withholding tax was inappropriately charged on these facts. In addition, the decision provides
assurance that the Indian courts are not necessarily going to decide cases solely on the basis of
what is in the best interests of the Indian government and its revenue needs, demonstrating that
the courts appear to be independent.
54

55. M&A in India After Vodafone
• Application of India’s tax rules is less ambiguous than prior to the Vodafone decision, and
there is the possibility of going to court to obtain relief if a nonresident company feels it
is being taxed unfairly.
• Based on language in the opinion, India will look more closely at substance of
transactions – this issue was discussed in the Vodafone decision and the Indian
legislature is expected to pass anti-avoidance laws that are the equivalent of the
substance-over-form doctrine in the US.
• NOTE: The Indian legislature is considering a bill that would permit the taxation of capital
gains on the indirect transfer of shares of an Indian company, where at least 50% of the
assets of the transferor (directly or indirectly) consist of assets in India. Importantly, the
bill would be retroactive to 1962, and accordingly would apply to transactions that
occurred prior to the bill’s passage.
55

56. M&A in China – Similar Issues?
•China has issued guidance that provides jurisdiction to tax transactions similar to the
Vodafone transaction – Circular 698 provides that China may impose a 10% withholding tax
on capital gains derived by non-Chinese companies form the sale or exchange of shares in
Chinese companies. Note that China may not offer the same judicial relief to nonresident
companies as India does. It is not even clear whether China is attempting to enforce this
rule.
•At the same time China is actively encouraging Chinese companies to make investments
outside China. In the 12th Five Year Plan, China announced its intention to support these
cross border deals by relaxing regulations for these transactions, siging investment
protection agreements (including with the EU), and seeking to enter into and update tax
treaties.
56

57. Questions?
57

58. CBIZ MHM, LLC Contacts
Stuart Anolik
Managing Director
 301.951.3636  sanolik@cbiz.com
58

59. Thank You
59